Question: “We have operations in multiple states. How can we prepare a single form of Dealer Agreement enforceable in each of those states?”
James Waite’s Answers: You and/or your attorney must review each state’s dealer and in some cases, franchise laws to determine whether and to what extent they apply. Then conform your dealer agreement to each, ensuring that it doesn’t waive any important statutory protections. First it is essential to identify what “important” means to your operation by reviewing some key legal and operational issues.
OPERATIONAL ISSUES: Dealer Agreements must, of course, address certain operational issues, including at least:
- Location(s): Where the dealer’s physical operations are or will be located. Crucially, some state dealer laws allow suppliers to immediately terminate Dealer Agreements in cases where dealers close or change locations without the supplier’s authorization.
- Territory: The territory or market area within which your dealership will be authorized to sell, rent and/or service the supplier’s equipment (Note: Also consider online transactions).
- Equipment Types: The types of equipment that are to be made available within such territories. Beyond the fact that making the right equipment available within a given market is generally critical, equipment type can also determine whether a given state’s dealer law applies.
- Purchase Requirements: The minimum number of machines, and levels of parts, supplies, consumables and other items the dealer will be required to purchase.
- Sales Requirements: Sales requirements tend to be independently important to suppliers because their state-mandated “repurchase” obligations (upon termination) are generally eliminated when equipment is sold by a dealer to a third party.
- Rentals: Whether, and to what extent, the supplier and/or its lender might restrict rentals or leases of equipment, parts and/or components purchased on credit.
- Stocking Levels: Minimum required stocking levels of equipment, parts and supplies.
- Prices: Pricing for each of the above, and whether, when and how they prices be adjusted during the term of the Dealer Agreement.
- Terms: Delivery and payment terms for items purchased.
- Warranty Support: Levels of required warranty services, if any, the dealer must provide, and whether those requirements will extend to equipment sold or leased within the dealer’s territory by the supplier and/or other dealers.
LEGAL ISSUES:
- Performance: Each party’s commitment to timely deliver equipment, parts, supplies, services, etc. (Remember, “best” efforts is a much higher standard than “commercially reasonable” efforts).
- Timing: A requirement that deliveries of equipment, spare parts, supplies, consumables, etc. be made within a reasonable time (Note: In recent years, “supply-chain delays” have become common, and often abused, features of force majeure provisions, generating considerable pushback from counterparties).
- Obsolescence: A right to return and exchange obsolete products for new designs and updated technologies.
- Rebates and Discounts: Whether and under what circumstances the dealer will be entitled to rebates, concessions, subsidies, refunds and/or discounts.
- Facilities: The number of, location(s) and often, specifications applicable to facilities the dealer will be authorized or required to operate.
- Financing: Whether any special financing might be available from the supplier or its designated third-party lenders.
- Exclusivity, whether:
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- The dealer will be granted the right to sell and/or lease exclusively within a defined territory and without competition from the supplier and/or the supplier’s other dealers. Note: If a territory is to be exclusive, that fact should be specifically set forth.
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- The supplier and/or any other dealer(s) is/are to be entitled to sell to “national accounts” or to other customers within that territory, and if so, whether the dealership will be entitled to a commission or enhanced service fee(s) or labor rate(s) on such sales.
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- The supplier will be the sole source of the identified equipment types for the dealer. Note: The supplier may insist on this in exchange for making the dealer’s territory exclusive.
- Transferability: Whether and on what terms sales of the dealership or transfers upon death of the owner will be permitted.
- Force Majeure: Whether and to what extent either party should be relieved of its responsibilities as a result of “Act of God” or other facts or circumstances beyond its reasonable control.
- Product Warranties: What express or extended warranty, if any, may be provided by the supplier and/or the dealer.
- Policies and Manuals: Terms and conditions for incorporation of policies and manuals.
- Terminations: Requirements for terminations, identification of potential material breaches, notice/cure periods, repurchase obligations, and any other termination-related protocols should be spelled out.
Although the parties’ ability to collaborate for their mutual benefit certainly remains the most important part of most dealer-supplier relationships, important legal, financial and operational issues continue to be heavily negotiated. A properly written dealer agreement must not only clearly reflect the parties’ agreements, it must also anticipate how the dealer laws of, in many cases, multiple states might impact those agreements (in some instances, state dealer laws nullify entire sections of dealer agreements).
This can make negotiating and documenting a supplier-dealer relationship surprisingly complicated, especially for newcomers. But getting it right before the relationship commences can be crucial for both sides, particularly in states that require “good cause” for termination.
